Finding a Forex Setup in the Commodity Weakness

Trends and momentum are magnificent parts of price action for Forex traders…

BUT trading them becomes less simple when price has accelerated into a far distant territory.

A trader has 3 options: trade a reversal, with the trend or wait.

Reversal trade setups are usually ill timed (entered too soon) because the momentum still pushes to higher highs or lower lows.

There is nothing wrong with waiting but it does not generate revenue, which means that traders cannot wait forever.

Traders can trade with the momentum and trend, which is the better choice.

But how and where does a trader enter when price has already moved a considerable distance?

That is today’s focus and we will analyze it on the CAD.

USDCAD

The USDCAD is in massive bullish momentum. Last month’s monthly candle was an impressive 1188 pips measured from high to low, with a candle close only 6% away from the high. The size of the bar indicates strength and the close indicates that the bulls are in control. The drop in oil price only seems to be fueling the trend to higher levels. Here is the monthly chart.

How do you enter such a monster bar?

One way is by placing a Fibonacci retracement on the candle itself (blue Fib), entering at a retracement of the candle, and placing the stop loss below the candle low. BUT in this case not many traders are happy with a 750 pip stop loss…

Another way is to use multiple time frame analysis, like we did earlier this week (see the setup here). when we saw a consolidation triangle on the 4-hour chart. The breakout trade is working very well: a trail stop loss (orange line) below the 4-hour lows already ensures a decent profit: +80 pips versus an original risk of 70 pips (and the trade is still open and can become more).

If a FX trader is not in this setup, then a new breakout or pullback must occur before the pair is tradable. At the spot price is not a critical decision spot (more explanation here). Please see the screenshot for the zones that I am considering for new setups, which are confirmed by candle stick patterns.

GBPCAD

The GBPCAD uptrend also had a bullish breakout recently. This setup is doing well and is booking a sizeable profit.

For those not in that trade, the best thing is to wait for a pullback and better setup. The main reason is the daily chart which is showing a shooting star with a sizeable wick on the top of its candle.

Sometimes a trader needs to be patient and wait for the setup to meet their demands. The GBPCAD is such an example. Avoid chasing the market. I am waiting for price to retrace back to the support zone (green lines) after which I require a bullish reversal candle stick pattern before entering a long.

The main target is the -27.2 Fibonacci level at 1.9590 which offers tons of wide open space to the upside.

Disclaimer: Trading forex on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

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